2024 (11) TMI 1171 - HC - Indian Laws

Chartered accountant penalized for issuing utilization certificates without verifying documents under clause 7 Second Schedule

The Chartered Accountants Act, 1949, [Prior To Amendment Act, 2006, Recommendation Of The Council Of The Institute Of Chartered Accountants Of India In Its 374TH Meeting Of The Council Held From 21ST TO 24TH March, 2018 At New Delhi and The Institute Of Chartered Accountants Of India Versus CA Shri Subhajit Sahoo & Anr

Delhi HC upheld professional misconduct finding against chartered accountant under clause (7) of Part-I of Second Schedule to the Act for gross ... Professional misconduct - scope of clause (7) of Part-1 of Second Schedule to the Act - whether, on the basis of the material available on record, the petitioner has been rightly held guilty of professional misconduct, as covered under clause (7) of Part I of the Second Schedule to the Act, and whether an order from this Court under Section 21(6) of the Act is merited? - HELD THAT:- Coordinate Bench of this Court in case of Institute of Chartered Accountants of India, New Delhi v. B.L. Khanna & Anr. [2000 (9) TMI 1094 - DELHI HIGH COURT], had the occasion to explain the scope of clause (7) and the meaning of ‘gross negligence’. It was held that whether the professional was grossly negligent or not would depend on the fact whether he had applied his mind diligently to the job entrusted to him, and whether due care and caution, as is required to be adopted, was taken. Additionally, it should also be seen whether there was failure to act honestly or reasonably. It was also observed that “when a Chartered Accountant signs certificates, minimum that is expected to do is to verify the accuracy of the figures certified.” It does appear that the respondent no. 1, on the mere asking of the Society, and without seeking any document from the Society in this regard, had mentioned amount of ₹ 41,000/- as expenditure towards Additional Essential Machinery in the second Utilisation Certificate, and also later certified that this certificate would supersede all the previous certificates issued by him. There was also no reason assigned by him in the said clarification, as to why the second Utilisation Certificate would supersede the previous certificates issued by him. It is noted that in the case of Council of Institute of Chartered Accountants of India v. Dayal Singh FCA, [2007 (5) TMI 696 - DELHI HIGH COURT], the allegations against the respondent therein (a chartered accountant) were that he was instrumental in getting a loan sanctioned from Union Bank of India in favor of an entity, on the basis of forged documents such as quotations, supply orders, money deposit receipts of various firms, rent deed and rent receipts etc., and that he had given a false certificate stating that the concerned entity had brought the contribution required in the books on the basis of which loan had been released from Union Bank of India. Similarly, in The Institute of Chartered Accountants of India v. Manakchand Laxman Baheti, [2023 (10) TMI 1101 - BOMBAY HIGH COURT], the Division Bench of Bombay High Court noted that the reports of the Disciplinary Committee had revealed that the respondent therein (a chartered accountant) had no documents on the basis of which the certificates were issued by him. The certificates simply stated that they had been issued on the specific request of the firm. On being asked to produce documents regarding statements of expenditure incurred by the firms, invoices/vouchers for purchase of plant and machinery for civil work and land development etc., the respondent therein was unable to produce any document. The conduct of the respondent no. 1 in issuing the first Utilisation Certificate would not amount to ‘gross negligence’, the fact that while issuing the second Utilisation Certificate dated 28.01.2004, the respondent no. 1 did not seek any document such as invoices or receipts or bank statements or road permit for bringing machinery in the State of Manipur (as it appears from the record) from the Society which would show return of machinery of ₹ 2,50,000/- and purchase of another set of machinery of ₹ 41,000/-, would amount to lack of due diligence and gross negligence on part of the respondent no. 1, more so when the Utilisation Certificates issued by the respondent no. 1 were for the purpose of securing loans from the complainant. The Council has not erred in holding the respondent no. 1, guilty of professional misconduct under clause (7) of Part-I of Second Schedule to the Act - Insofar as the recommendation for removing the name of respondent no. 1 from the Register of Members for one year is concerned, it is noted that the respondent no. 1 has been a member of ICAI for approximately three decades, with no history of any other complaint or allegation of misconduct on record. The present complaint was filed against him in the year 2005, and the proceedings against him have remained pending for about 19 years. Considering that the present proceedings have continued for 19 years without any history of professional misconduct by the respondent no. 1, the ends of justice would be served by severely reprimanding the respondent no. 1, under Section 21(6)(b) of the Act, for his professional misconduct - the present reference is disposed of. Issues Involved:1. Whether the respondent was guilty of professional misconduct under clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.2. Whether the standard of proof in disciplinary proceedings for professional misconduct should be beyond reasonable doubt or based on the balance of probabilities.3. Whether the recommendation to remove the respondent's name from the Register of Members for one year was appropriate.Issue-wise Detailed Analysis:1. Professional Misconduct:The primary issue was whether the respondent, a Chartered Accountant, was guilty of professional misconduct under clause (7) of Part I of the Second Schedule to the Act, which pertains to gross negligence in the conduct of professional duties. The case arose from discrepancies found in the Utilisation Certificates issued by the respondent for a loan sanctioned to a Society. The Disciplinary Committee and the Council found that the respondent failed to verify the machinery physically and relied on a certificate from another CA firm, which turned out to be forged. The respondent also issued a second Utilisation Certificate without adequate verification, reflecting a lack of due diligence. The Court held that the respondent's actions amounted to gross negligence, as he did not exercise the required care and caution expected of a Chartered Accountant.2. Standard of Proof:The respondent argued that the charges of professional misconduct should be proved beyond reasonable doubt, akin to criminal proceedings. However, the Court clarified that the standard of proof in disciplinary proceedings for professional misconduct is higher than the balance of probabilities but does not reach the level of proof beyond reasonable doubt required in criminal cases. The Court referred to various precedents, emphasizing that the findings in such proceedings must be sustained by a convincing preponderance of evidence.3. Appropriateness of the Recommended Punishment:The Council recommended removing the respondent's name from the Register of Members for one year. However, the Court noted that the respondent had been a member of ICAI for approximately three decades with no history of other complaints. Given that the proceedings had been pending for about 19 years, the Court considered the prolonged duration of the case and the absence of prior misconduct. Drawing from similar cases, the Court decided that a severe reprimand would suffice as a penalty, modifying the Council's decision accordingly.In conclusion, the Court upheld the finding of professional misconduct but modified the penalty, opting for a severe reprimand instead of removal from the Register, taking into account the respondent's long-standing membership and the protracted nature of the proceedings.